TeliaSonera rejects $42bn France Telecom approach

TeliaSonera AB Thursday rejected a $42 billion approach from France Telecom aimed at creating Europe's largest telecoms operator by revenue, but the French giant insisted a deal remains possible.

In a blunt statement TeliaSonera, which operates the dominant fixed-line networks in Sweden and Finland and has activities as far flung as Kazakhstan, said the French approach "substantially undervalues the company".

TeliaSonera's reaction was echoed by the Swedish government, its largest shareholder with a 37.3% stake, which said the offer was too low. The government said it's still open to approaches from other interested parties.

The indicative price of SEK56.225 a share would value TeliaSonera at around SEK252 billion according to a Dow Jones Newswires calculation.

France Telecom Chief Executive Didier Lombard shrugged off TeliaSonera's rejection as "a normal position at this stage" and said talks would continue for a further 15 days.

Lombard said, though, that France Telecom wouldn't change the financial aspects of its offer and could walk away from the deal if the two companies can't reach an agreement.

"One thing on which we think we have the suitable ratio, which won't move, is the parity between the shares of the two groups," Lombard said.

"However, there are numerous non-monetary parameters which can be adjusted," he added, without elaborating.

Lombard stressed that the support of the TeliaSonera board and the Swedish and Finnish governments is crucial to the success of any deal.

The potential deal, along with a possible bid for Alltel Corp by Verizon Wireless also announced Thursday, has led to some traders to speculate that the market is about to see a new wave of telecoms deals as players aim for ever-larger scale.

But France Telecom's interest in TeliaSonera, first expressed in April, has alarmed analysts and investors, many of whom remain unconvinced by the strategic merits or potential synergies put forward by the company.

The approach is a "poor deal for both parties," Citigroup analysts said in a note to investors. Citigroup has a hold rating on France Telecom and a buy rating on TeliaSonera.

The analysts said they were skeptical about the synergies from the deal and suggested France Telecom would be better off using its cash for share buybacks or to pursue direct deals for emerging market operators.

At 1044 GMT TeliaSonera shares were up SEK4 or 7.4% at SEK57.75, higher than the proposed offer price, suggesting investors are betting on a raised bid. France Telecom shares were down EUR0.82 or 4.2% at EUR18.41.

France Telecom in a statement before the market opening said no formal public offer has been made, but that it put a proposal to TeliaSonera's board of directors and its two largest shareholders, the Swedish and Finnish governments.

A successful offer would create Europe's largest telecom operator by revenue and produce a telecom behemoth with over 237 million customers and operations stretching from the edge of the Arctic Circle to the Indian Ocean.

France's incumbent operator said its indicative proposal for TeliaSonera was a mix of 52% euro denominated cash consideration equivalent to SEK63 for each TeliaSonera share and 48% share consideration based on an exchange ratio of three newly issued France Telecom shares for 11 existing TeliaSonera shares, with a cash guarantee option for the first 500 shares.

The proposed transaction would be accretive on an earnings-per-share basis from 2009 onwards and accretive in 2011 in terms of free cash flow per share, France Telecom said.

France Telecom said the terms of the proposal meet with the group's external growth criteria but that "there is no assurance" that the offer made to TeliaSonera and to its two largest shareholders "will give rise to a public offer."

The offer will not impact France Telecom's dividend policy, it said.

Traders said France Telecom's offer was expected and shares would come under pressure.

"It's clearly good news for TeliaSonera. The Swedish market should get a lift because of its weighting on the index," said Anders Berg at Evli Bank in Stockholm.

On top of TeliaSonera's base in mature Northern European markets, the deal would give France Telecom access to faster growing activities in Eastern Europe and Central Asia.

France Telecom's pursuit of TeliaSonera follows other moves to consolidate by Europe's incumbent operators. Telefonica SA purchased a stake in Telecom Italia SpA last year and Deutsche Telekom plans to take a 25% stake and management control of Hellenic Telecommunications Organization SA.